Clean Energy Bonds Expanded by the Economic Stimulus Act

February 18, 2009

Two bonding mechanisms for financing renewable energy and energy efficiency systems have been expanded under the tax section of the American Recovery and Reinvestment Act of 2009, which President Barack Obama signed on February 17. The act authorizes the allocation of as much as $1.6 billion in new Clean Renewable Energy Bonds (CREBs), which are tax credit bonds for financing renewable energy projects. CREBs were previously limited to a maximum of $800 million. The act also authorizes the allocation of $2.4 billion in qualified energy conservation bonds, up from the current limit of $800 million. These tax credit bonds are allocated to states and large local governments to finance a variety of clean energy projects.

Unlike normal bonds that pay interest, tax credit bonds pay the bondholders by providing a credit against their federal income tax. In effect, the new tax credit bonds will provide interest-free financing for clean energy projects. But because the federal government essentially pays the interest via tax credits, the U.S. Internal Revenue Service must allocate such credits in advance. However, tax credit bonds require the investment of a bondholder that will benefit from the federal tax credits, and those investors may be hard to find during the current business downturn. To try to draw more investment, a separate measure in the tax bill will allow regulated investment companies to pass through to their shareholders the tax credits earned by such bonds. Yet another measure adds a prevailing wage requirement to projects financed with CREBs or energy conservation bonds. See pages 39-41 and 143-149 of the American Recovery and Reinvestment Tax Act of 2009 (PDF 5.9 MB), as well as PDF pages 100-101, 118-123, and 148 of the accompanying joint explanatory statement of the conference committee (PDF 24.9 MB). Download Adobe Reader.